4 Reasons Why Banks’ Private Blockchains Will Fail

Let’s take a look with four reasons why banks will fail in building viable internal blockchains.

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Anyone else remember the time way, back in 2013, when any economic expert or establishment figurehead was saying Bitcoin was a waste of time and was doomed to fail? Basically laughing at it, while they stood on their bully pulpit?

Funny just how much the narrative has changed two years later. Today, Bitcoin’s Blockchain is great, and the other half of Bitcoin, the currency, is still bad. Is that what two years’ of education does, huh? Maybe in another two years, and another 15% rate of inflation in the interim, they will see the value in the digital currency?

2015 has been the “Year of the Blockchain” as the world’s leading financial institutions flock to study Bitcoin’s underlying advancements. Whether the establishment admits it or not, this stampede of positive energy in the economic sector towards the Blockchain indirectly validates Bitcoin’s core value.

The argument against the merit of Bitcoin becomes pretty thin when your Fortune 500 corporation is going to spend the rest of the decade breaking down what makes your appreciating asset class tick. Yet, is building a privatized and centralized blockchain for your bank a sweet idea? Or are those banks, failing to learn from history, are just repeating history?

Let’s take a look with four reasons why banks will fail in building viable internal blockchains.

Reason #1: If you could build a blockchain for a bank, why not turn it into a business

The legendary economic weekly “The Economist” featured Bitcoin’s Blockchain as their cover story, crystallizing the mainstream’s new love affair with Bitcoin’s technological backbone. In conjunction with this, The Economist created a panel discussion on the topic, which included Digital Currency Group CEO Barry Silbert. He had the following to say about bank-managed blockchain construction:

“I think they’re going to fail, and I think, ultimately, the people working on these projects at the banks are going to end up leaving the banks to work at startups that are building it outside.”

Banks are rife with regulations, bureaucracy, and red tape - things that should take months usually end up taking years for a bank to approve. The few people who might be able to put together a blockchain will simply run out of patience and either start their own blockchain business or pool their resources with other private practices in the field.

Why build one blockchain for one bank when you can brand your efforts and work for multiple businesses, while automating your processes, and build towards your own IPO? If you’re smart enough to build a blockchain properly, you’re also smart enough to monetize the concept for your own gain, not the bank’s, right?

Reason #2. By the time a bank actually builds one that MIGHT work…..

Banks have about as much history building innovations in technology as they do lowering credit card rates. Their business is making money off of their customers and the society as a whole, not advancing the state of the art.

Anyone, like me, who has any history with banking, knows a new product (that is really just a spin off an old product) takes a minimum of two years before it sees anything resembling the light of day. Think a debit card redesign with new features and benefits. You can double that timeframe for something as revolutionary as blockchain technology due to the issues mentioned above.

Do you know how far forward Bitcoin’s true blockchain, and the private sector, will be by the time their first system mock-up will be ready for action? It’s like hitting a moving target. Private companies may already be 2-3 years in, selling the technology and refining it in the real-world.

Reason #3. We went through this paradigm shift 20 years ago

Remember the Internet back in 1995. The telecoms and banks went through the same things the banks are facing today when the paradigm shifted back then.

What did they do with this new technology? They tried to co-opt it, without integrating it, just like today, as history repeats itself. The incumbents created a bunch of bad ideas like colored fax machines, ISDN, and corporate “Intranets,” where companies modeled the Internet, while taking all of the useful parts out of it.

History is not on the side of the banks maneuvering around the real blockchain with a knock-off. Banks don’t build great technology. They really don’t even use great technology, but if they do, it certainly didn’t come from within. Banks don’t want better, they just want control.

Reason #4. At the end of the day, the blockchain is just a ledger and a slow one at that

The ledger concept is so old it predates banking, and can be seen in evidence in ancient Egyptian hieroglyphics. Banks are ledgers. Assets and liabilities, credits and debits - this is the one thing they actually do well and are leaders in.

What do they need a slow database for? The key to Bitcoin’s success and their interest is really not the blockchain at all, but the merits of decentralizing monetary transfer, canceling out double-spends, and many other abilities the banking industry clumsily solves with counter-parties. After which, there arises a need to over-regulate for counter-party risk mitigation and fraud protection.

The banks are really causing their tail here, because no matter what the blockchain can do, they’ll still be on the same counter-party risk/fraud protection system twenty years from now. The blockchain won’t disrupt that and the flaws built into that system. They’ll feel their toes in the sand but will never bathe in the waters of decentralization.

Look at the bright side

The bad news for the banks is good news for Bitcoin. Every time the blockchain is mentioned by a mainstream heavyweight, the Bitcoin economy and community gets a pat on the back, whether intentional or not. Banks will never compliment Bitcoin as a currency because it is not in their best interest. Every dollar invested in Bitcoin is a dollar taken out of their fiat currency system, which is good for the planet, but bad for the stockholders.

So the Blockchain love affair is as close to a “you were right, we were wrong” as the Bitcoin community will ever get from the mainstream. Only when the banks can’t make a go of turning the blockchain into an internal cash cow, I’m sure they’ll say “See! Told you there was nothing there!”

Tell that to Bitcoin owners four years from now, sitting on quite an ROI after sticking with the real McCoy, and not buying into some CompuServe rehash. C’est la vie.